The news broke in late January. Amazon, J.P. Morgan Chase and Berkshire Hathaway were teaming up in a joint venture to do something about the high cost, complexity, and bureaucracy of U.S. health care. The announcement struck fear into the hearts of pharmaceutical and health insurance investors, and companies from Humana to UnitedHealth to CVS watched their share prices tumble.
There was only one problem. None of the three partners offered any details whatsoever about their planned venture, other than to say it would be "free from profit-making incentives and constraints." And they added, perhaps unnecessarily, that the venture was in its very early stages.
Some observers had high hopes for more detail in Berkshire Hathaway CEO Warren Buffett's letter to shareholders that accompanies the company's annual report. But the letter contained not one word about the new initiative.
CNBC to the rescue. Buffett sat down for a three-hour interview with Squawk Box co-anchor Becky Quick. Among many other topics, he answered her questions about the new health care venture. We still don't have much detail, but here's what we know so far:
1. Once the venture is up and running, it may open up to other companies.
For now, Buffett said, the venture is so new and unformed that the partners have yet to decide whether they are forming a company or not. "We don't necessarily have to form a company," he said. "We may form a company, and probably will. But it's just a joint effort now." He added: "That could be a partnership formed or different things. But our goal is really not just for the three companies. Our goal is something that other people can pick up on."
2. Its main purpose is to curb runaway health care costs.
One goal of the new joint venture is to deliver better health care that people feel better about receiving than may be true today, Buffett said. But its biggest goal is to control ever-rising health care costs. "I love the idea of tackling what I regard as the major problem of our economy," Buffett said.
In 1960, Buffett explained, health care costs made up about 5 percent of the U.S. gross domestic product (GDP). That came out to about $170 per person per year. Today those costs average more than $10,000 per person per year. "And they're closing in on 18 percent of GDP which is as much as the federal government raises in a year."
It doesn't have to be that way, he said. "Now, you want the best health care but you find that in other industrial countries that were at about our 5 percent level many years ago, they've gone up into the 11 percent range or thereabout. So we have a huge competitive disadvantage in American businesses, far more important than any tax change."
Part of the problem, he said, is the way incentives and priorities work within the health care industry. "There's a lot of good about our system. But the system, by its very nature, is not cost conscious. If you were a young medical person and let's say you're working on prostate cancer [which Buffett had] the rewards to you psychologically and with your peers are going to come if you do something that develops something better for prostate cancer, which they should. But they aren't going to come to you if you reduce the cost of treating it. There just isn't the same motivation."
3. Negotiating power may be one way to help lower costs, but it's not the only way.
What can the new partnership do to reduce health care costs? "It would be very easy, I think, to go in and shave off 3 or 4 percent off the cost of some things just using negotiating power," Buffett said. "That can be part of it, but we're looking for something much bigger than that. We are hoping to find out a way that the constant increases of percentage of GDP and at least be halted. And hopefully, to find a way where perhaps better care could be delivered, even at a somewhat lesser cost."
4. It won't be easy or quick.
Buffett is well aware of the obstacles facing any initiative toward cost reduction in health care. "You talk about something that has $3.3 trillion in revenues presently going to people, and most people that are on the reception end of the $3.3 trillion are happy with things," he said. "And they'll all say things could be done better--but not in their particular segment."
Making systemic changes in this environment won't be easy or fast, he said. "It's going to take a terrific CEO a lot of commitment, probably some important mistakes, lots of time. I'm not interested in lots of time. At 87, I want to keep it moving. But this is not easy. If it was easy, it'd have been done."
5. The first step is finding the right CEO.
Buffett said the partners are currently on the hunt for the right person to lead this initiative. While they've been "inundated" with candidates, they will make that selection very carefully, he said. The partners have also received numerous offers of help from people and organizations, as well as inquiries from organizations that would like to participate in the venture. It's too early for all that, he said.
Asked for a timetable, he said he expected to have the CEO in place within a year, but perhaps not accomplish much more than that. He added that the challenges are huge and other organizations have failed. But, he said, "I do think we have the right three partners. And the job now is to get the right CEO. That's an enormously important job and we can't afford to make a mistake. That is our first and most important order of business. And then--we go forth."